The Accounting Cycle

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Financial Accounting

The Accounting Cycle

Key Things To Know

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1. A trial balance is done for the purpose of determining

a. that total debits equal total credits
b. that all transactions have been recorded
c. net income
d. the balance of each account

Check Your Answer
A. A trial balance lists all accounts and balances that will be presented on the financial statements. The trial balance makes sure that debits equal credits which means the balance sheet will balance. A balanced trial balance does not mean all transactions are recorded (b.). The trial balance includes all income statement accounts; however, the purpose is not to determine net income (c.) The balance of each account is determined when all transactions are summarized (d).
2. The difference in an unadjusted trial balance and an adjusted trial balance is

a. closing entries
b. adjusting entries
c. permanent entries
d. the cash balance is different

Check Your Answer
B. The only difference in the two is the adjusted trial balance shows accounts and amounts that include adjusting entries. The adjusted trial balance gives the final amounts that will be reported in the financial statements.
3. The correct order of the accounting cycle is

a. record transactions, closing entries, adjusting entries
b. adjusting entries, closing entries, record transactions
c. adjusting entries, closing entries, prepare financial statements
d. prepare financial statements, adjusting entries, closing entries

Check Your Answer
C. The accounting cycle is performed in the following order: record transactions, prepare unadjusted trial balance, record adjusting entries, prepare adjusted trial balance, prepare income statement, prepare closing entries, prepare balance sheet.
4. Adjusting journal entries are made for the purpose of

a. making sure revenues earned and expenses incurred are recorded in the same
period
b. correcting the cash balance
c. transferring revenues and expenses to retained earnings
d. none of the above

Check Your Answer
A. Adjusting journal entries adjust revenue and expense accounts to make sure revenues are reported when earned and expenses are recorded when incurred. Adjusting entries record economic events that do not impact cash this period (b.) (c.) is closing entries.
5. Which financial statement should be prepared first?

a. cash flow statement
b. balance sheet
c. income statement
d. statement of owner’s equity

Check Your Answer
C. The income statement is prepared first in order to determine net income which must be transferred to retained earnings before the final balance for retained earnings is determined and reported on the balance sheet. The statement of owner’s equity also requires a net income amount. The cash flow statement is prepared using both the income statement and balance sheet and must be prepared after these two statements.
6. Temporary accounts are

a. assets and liabilities
b. revenues and expenses only
c. revenues, expenses, gains, losses
d. assets only

Check Your Answer
C. Temporary accounts are all accounts reported on the income statement. They are called temporary because they accumulate transactions for this year only and then they start over for next year after they are closed. Revenues, expenses, gains, and losses are all reported on the income statement. Balance sheet accounts are permanent accounts and are not closed out.
7. Permanent accounts are

a. assets, liabilities, owner’s equity
b. revenues and expenses only
c. revenues, expenses, gains, losses
d. assets only

Check Your Answer
A. Permanent accounts are all accounts reported on the balance sheet. These accounts are not closed out and do not start over at the beginning of each year. They are not transferred to retained earnings.
8. Closing entries are made to

a. zero out balance sheet accounts
b. zero out income statement accounts
c. adjust revenues and expenses
d. get debits equal to credits

Check Your Answer
B. Closing entries are made to income statement accounts so they can start over at the beginning of the next year. Income statement accounts accumulate amounts for the current period only. Income statement accounts are transferred to retained earnings.
9. A post closing trial balance shows only

a. assets, liabilities, owner’s equity
b. revenues and expenses
c. revenues, expenses, gains, losses
d. assets

Check Your Answer
A. A post closing trial balance is done after closing entries are made. Closing entries make the balance in Income statement accounts 0 and there is nothing to put on the post closing trial balance. The post closing trial balance shows only accounts with a balance; all balance sheet accounts.
10. Which of the following accounts are used in closing entries?

a. assets, liabilities, owner’s equity
b. revenues and expenses
c. revenues, expenses, gains, losses, dividends paid
d. assets only

Check Your Answer
C. Closing entries are made to income statement accounts so they can start over at the beginning of the next year. Income statement accounts accumulate amounts for the current period only. All accounts that are reported on the income statement must be closed. Dividends paid is for this period only and this account must also be closed.
11. The balance of retained earnings on a post closing trial balance is

a. the ending balance
b. the beginning balance
c. the amount on last period’s balance sheet
d. adjusted for dividends paid only

Check Your Answer
A. The retained earnings balance on a post closing trial balance is the balance after all closing entries have been made; the ending balance. It is the beginning balance plus income less dividends. It is the final balance that will be reported on the balance sheet as of the end of the period.
12. A trial balance that reports debits equal to credits means that

a. all transactions are recorded
b. all amounts are properly recorded
c. debits equal credits only
d. all adjustments are properly made

Check Your Answer
C. Debits equal credits will not mean that all transactions are properly recorded or that all adjustments have been made. It simply means that for all journal entries made, debit amounts were equal to credit amounts. The company could have used wrong account names or failed to record transactions and necessary adjustments.
13. Temporal accounts are closed because

a. the balance sheet is as of a certain date
b. the balance sheet is for a period of time
c. the income statement is for a period of time
d. the income statement is as of a certain date

Check Your Answer
C. Temporal accounts, income statement accounts, are closed because these accounts represent amounts only for a period of time. They are not cumulative (like balance sheet accounts) and they must start over each period. The closing entry transfers amount to retained earnings so the account can start over at 0.
14. Permanent accounts are not closed because

a. assets and liabilities do not go to 0 when the period ends
b. assets and liabilities go to 0 at the end of each period
c. debits would not equal credits if they were
d. revenues and expenses do not go to 0 for the beginning of the period

Check Your Answer
A. A company’s assets, liabilities and owner’s equity is not 0 at the end of each period. The balance sheet reports what the company has and owes on a certain date and this is a cumulative amount. The income statement reports for a period of time, so income statement accounts are not cumulative.
15. The two things that a closing entry accomplishes is

a. get debits equal to credits and balance the accounts
b. get adjusting entries to 0 and transfer the balance of all accounts to retained earnings
c. make income statement accounts 0 and transfer the balance to retained earnings.
d. get all accounts to 0 so that you can start over for the next period.

Check Your Answer
C. Closing entries make all income statement accounts go to 0 at the end of the period by transferring the balance to retained earnings. Balance sheet accounts are not closed.